Based on recommendations from the Federal Trade Commission, the Consumer Financial Protection Bureau, the U.S. Department of Education and thousands of consumer reviews, there are four key areas you should focus on when comparing private student loan lenders:
- Product offerings
- Additional features
Once you’ve determined the type of student loan you’ll need, and about how much you want to borrow, check to see that the lenders’ offerings match your requirements. You can then compare their loan terms and limits to narrow down your list. For example, make sure the lender offers financing for your degree type.
Research lender eligibility requirements including citizenship status, enrollment, income and credit history. You should make sure you’re likely to qualify for a student loan before you apply. Student loan eligibility requirements typically include:
- Citizenship status. Private student loans are generally only available to U.S. citizens, U.S. nationals and permanent resident aliens. International students may be eligible if they have a U.S. citizen, national or permanent resident alien co-sign the loan.
- Enrollment. Lenders may only offer loans to students who are enrolled at least half time within an eligible school.
- You must meet the age of majority in your state of residence or have an eligible co-signer.
- Income. There may be income requirements, including debt-to-income ratio requirements, which you or your co-signer must meet.
- Credit history. With private student loans, your credit history and score can determine your eligibility for a private loan and the interest rate you’ll receive. If you don’t have good credit or haven’t yet established any credit, you may need to have a creditworthy co-signer, such as a parent or other trusted relative. Your co-signer’s credit will be considered with your application. This makes the co-signer legally responsible for the student loan.
The cost of your private student loan will depend on a variety of factors, including your interest rate and the type of interest you choose. Look closely at fees to calculate how they’ll impact your total cost of borrowing.
Some lenders offer preapprovals, which will give you an estimated interest rate without hurting your credit. It’s worth getting a preapproval if it’s an option, as you can reliably find out the interest rate you’ll be offered by each lender.
Lenders often have fees for applying or originating your loan. Not all lenders charge these, but you should always read the loan terms closely to identify potential fees, such as:
- Application fee. The lender may charge a non-refundable fee to process your application.
- Origination fee. Origination fees, sometimes called disbursement fees, aren’t common on private student loans. If the lender charges one, it’s usually a fee that’s equal to a percentage of the amount you borrow.
- Late fee.A fee required if your monthly payment is late. It may be a percentage of the amount due with a maximum amount, such as $15 or $25.
Interest capitalization isn’t a fee, but how and when your interest is capitalized (becoming part of your loan principal) will influence your loan’s total cost.
Some lenders let you forgo loan payments during school and for the first several months after graduation. Interest accrues on your loan principal, and when your interest capitalizes, your principal increases. As a result, you’ll accrue more interest each month.
Interest capitalization also happens if you stop making payments, but continue to accrue interest in the future, such as when you put your loans into forbearance or deferment or stop making payments.
One thing you don’t have to worry about with student loans is a prepayment penalty. Unlike some other types of loans, such as a mortgage or personal loans, lenders aren’t allowed to charge you a fee if you pay off your student loan early.
The fine print in private student loans can vary from one lender to another. Some benefits or features could make it easier to repay the loan, lower your interest rate or make a lender a better option for other reasons.
- Autopay savings.Many lenders offer an interest rate discount if you sign up for autopay. The discount is often 0.25% or 0.50%, however, it may not take effect until you start making full principal and interest payments.
- Other savings opportunities. Some lenders offer a discount if you have another financial product with them, such as a loan or bank account.
- Early repayment options. Private student loans start to accrue interest as soon as they are dispersed. Some lenders have repayment plans that start while you’re in school. Making interest-only payments, full payments or a fixed monthly payment will help lower your loan balance before you graduate.
- Deferment options. You might be able to defer making any payments while you’re in school. Lenders may offer a grace period after you graduate or drop below half time and you won’t need to make full payments until the grace period ends.
- Deferment due to financial hardship. You may be able to defer your student loan payments if you go back to school, join the military or can’t afford payments due to another covered reason, such as a job loss.
- Discharge due to death or permanent disability. Find out whether your loan balance passes on to your estate or co-signer if you die before it’s repaid. Also, find out what happens if you become permanently disabled and can’t afford to repay the debt.
- Co-signer release. Lenders may release the co-signer from the loan after the student makes a series of on-time payments and if he or she qualifies to take on the loan.